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Macroeconomic Variables and South African Stock Return Predictability

  • Rangan Gupta

    ()

    (Department of Economics, University of Pretoria)

  • Mampho P. Modise

    ()

    (Department of Economics, University of Pretoria and South African Treasury, Pretoria, South Africa)

We examine both in-sample and out-of-sample predictability of South African stock return using macroeconomic variables. We base our analysis on a predictive regression framework, using monthly data covering the in-sample period between 1990:01 and 1996:12, and the out-of sample period commencing from 1997:01 to 2010:06. For the insample test, we use the t-statistic corresponding to the slope coefficient of the predictive regression model, and for the out-of-sample tests we employ the MSE-F and the ENCNEW test statistics. When using multiple variables in a predictive regression model, the results become susceptible to data mining. To guard against this, we employ a bootstrap procedure to construct critical values that account for data mining. Further, we use a procedure that combines the in-sample general-to-specific model selection with tests of out-of-sample forecasting ability to examine the significance of each macro variable in explaining the stock returns behaviour. For the in-sample tests, our results show that different interest rate variables, world oil production growth, as well as, money supply have some predictive power at certain short-horizons. For the out-of-sample forecasts, only interest rates and money supply show short-horizon predictability. Further, the inflation rate shows very strong out-of-sample predictive power from 6-months-ahead horizons. When accounting for data mining, both the in-sample and the out-of-sample test statistics become insignificant at all horizons. The general-to-specific model confirms the importance of different interest rate variables in explaining the behaviour of stock returns, despite their inability to predict stock returns, when accounting for data mining.

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Paper provided by University of Pretoria, Department of Economics in its series Working Papers with number 201107.

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Length: 19 pages
Date of creation: Mar 2011
Date of revision:
Handle: RePEc:pre:wpaper:201107
Contact details of provider: Postal: PRETORIA, 0002
Phone: (+2712) 420 2413
Fax: (+2712) 362-5207
Web page: http://www.up.ac.za/economics

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